Unit 4-6

Which of these investment companies trade in the secondary market? A) Open end funds B) Face amount certificates C) Closed end funds D) Unit investment trusts

C) Closed end funds Another name for closed end funds is publicly traded funds because they trade in the market like stock of other companies. The other three investment companies listed here are purchased and redeemed through the issuer (a primary market transaction).

Which of the following investment companies do not redeem their shares? A) Unit investment trusts B) Face amount certificates C) Closed end funds D) Open end funds

C) Closed end funds Face amount certificates, unit investment trusts, and open end funds all redeem their shares. Closed end funds do not redeem their shares.

When speaking to a customer about exchange-traded funds (ETFs), a registered representative could make which of the following correct statements? A) ETFs can be purchased only by paying a sales charge added to the NAV. B) ETFs cannot be bought on margin. C) ETFs have different potential tax consequences than mutual funds. D) ETFs cannot be purchased using traditional limit or stop orders.

C) ETFs have different potential tax consequences than mutual funds. The potential tax consequences of owning an ETF can be different than those experienced when owning mutual funds. While an ETF can make a capital gains distribution, they generally do not—unlike a mutual fund, which generally would make such distributions on an annual basis. ETFs can be traded like other exchange products using traditional stock-trading techniques and order types and are priced by supply and demand. Customers pay commissions, not sales charges.

A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may not make which of the following statements? A) The fund will pay its investment adviser a specified percentage of funds under management. B) The fund will have a calculated fully disclosed expense ratio. C) The fund is a no-load fund. D) The fund will have a diversified portfolio with a stated investment objective.

C) The fund is a no-load fund. The fund would be expected and required to make statements regarding its diversification status, its expense ratio, and the rate at which it pays its adviser. It definitely may not, however, claim to be a no-load fund if it charges a 12b-1 fee, fees charged to market the fund's shares, of more than 0.25% of net assets.

All of the following would be included in the expense ratio of a fund except A) portfolio management fee. B) salaries and administrative fees. C) front-end or back-end load. D) 12b-1 fee.

C) front-end or back-end load. The expense ratio includes ongoing operating expenses but not sales charges. A front- or back-end load is a sales charge.

An example of securities that are established by states to provide other government entities such as cities, towns, school districts or state agencies with a short-term investment vehicle to invest funds include A) money market instruments. B) tax anticipation notes (TANs). C) local government investment pools (LGIPS). D) bond anticipation notes (BANs).

C) local government investment pools (LGIPS). LGIPs are established by states to provide other government entities within its borders such as cities, counties, school districts or other state agencies with a short-term investment vehicle to invest funds.

The general partner of a limited partnership has responsibility for all the following except A) paying partnership's debts. B) managing the day-to-day operations. C) providing all of the partnership capital. D) organizing the business.

C) providing all of the partnership capital. The general partner organizes and manages the partnership and assumes unlimited liability, responsible for paying all partnership debts. While some capital may also be provided by the general partners (GPs), it is the limited partners who provide the bulk of the capital.

The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances is known as A) securities risk. B) nonsystematic risk. C) systematic risk. D) investment risk.

C) systematic risk. Systematic risk is the risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances. Common causes that can impact all securities or investments might be war, global security threats, and inflation.

Which of the following statements is true regarding Exchange-traded notes? A) Exchange-traded notes (ETNs) are junior, unsecured debt securities issued by a municipality B) Exchange-traded notes (ETNs) are backed by the good faith and credit of the United States government C) Exchange-traded notes (ETNs) track performance to U.S. Treasury notes D) Exchange-traded notes (ETNs) are senior, unsecured debt securities issued by a bank or financial institution.

D) Exchange-traded notes (ETNs) are senior, unsecured debt securities issued by a bank or financial institution. ETNs are senior, unsecured debt securities issued by a bank or financial institution. They are backed only by the good faith and credit of the issuer. The notes track the performance of a particular market index but do not represent ownership in a pool of securities the way share ownership of a fund does. ETNs are bond like with a stated maturity date but do not pay interest and offer no principal protection. ETN investors receive cash payments linked to the performance of its underlying index less management fees when the note matures.

Which of the following would be included in a mutual fund's list of expenses? I: Shareholder records and service II: Investment advisor's fee III: Broker-dealer sales charges IV: Underwriter's sales loads A) II and III B) III and IV C) I and IV D) I and II

D) I and II Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

For a real estate DPP, which of the following is true? A) Capital growth can be derived from rents received. B) Neither income nor capital growth would come from rents received. C) Income will come from appreciation of the portfolio properties. D) Income can be derived from rents received for the properties.

D) Income can be derived from rents received for the properties. For real estate DPPs, both income and capital growth are possible. Income comes from the property rents received, and capital growth would come from the appreciation of the properties.

The violation of selling mutual fund shares just below the point where the customer would qualify for lower sales charges and not informing the customer that they may qualify for lower sales charges is A) pegging. B) capping. C) supporting. D) a breakpoint sale.

D) a breakpoint sale. The is the definition of break point sale, and it is a violation of sales practices. The others are forms of market manipulation.

A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be A) a nonfixed UIT. B) a fixed UIT. C) a mutual fund. D) a closed-end company.

D) a closed-end company. A closed-end company, or closed-end management investment company, is much like any other company, just that its source of profit is investments, rather than selling a product or service. Shares of closed-end companies are traded in the secondary markets, while the other choices listed here offer only redeemable securities.

In a leasing partnership program, loans are taken to purchase equipment that is then leased to companies in return for the lease payments. This process A) allows for the equipment to be depreciated, adding to the income realized by the partnership. B) enables the partners to take tax credits against the income received from the lease payments. C) eliminates any possibility of sheltering the income from the lease payments received with deductions or credits. D) allows for the loan interest and equipment depreciation to be taken as deductions that will shelter the income from the lease payments received.

D) allows for the loan interest and equipment depreciation to be taken as deductions that will shelter the income from the lease payments received. When a leasing program purchases equipment that it will lease to companies in return for the lease payments, the program can deduct over the life of the program any interest costs on the loans to purchase the equipment, as well as any depreciation on the equipment it owns and leases. These deductions shelter the income taken in from the lease payments.

Partners in direct participation leasing programs can receive write-offs for all the following except A) interest expenses. B) operating expenses. C) depreciation. D) depletion.

D) depletion. Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. Depletion, however, is a deduction associated with natural resources programs, such as oil and gas.

A limited partnership (LP) A) is run by investors who are the limited partners. B) is limited and can have only investors and no partners. C) has one type of partner. D) has two types of partners.

D) has two types of partners. LPs have two types of partners: general and limited. There must be at least one of each. It is the general partner who is responsible for running the partnership entity.

Mutual fund shares are required to be priced at least A) each day at the opening of the market. B) continuously throughout the day. C) hourly. D) once per business day.

D) once per business day. Most funds are priced (calculate a new net asset value) at the close of the day, but the rule just requires that they be priced at least once per business day. They may perform this calculation more than once a day, but that is rare.

All of the following would be advantages of a limited partner in a DPP except A) cash distributions of capital gains. B) cash distributions of earning. C) deductions for business expenses. D) participate in the management of the business.

D) participate in the management of the business. Limited partners who take on a management role lose their limited liability protection.

All of the following are types of direct participation programs (DPPS) except A) leasing. B) real estate. C) oil and gas. D) retail distribution.

D) retail distribution. The most common types of direct participation programs are real estate, oil and gas, and leasing programs.

Which of the following would be unlawful regarding use of a mutual fund prospectus? A) Calling an investor's attention to a section that may be interesting B) Sending a prospectus to someone who has shown no interest in the fund C) Leaving a typographical error in the text unmarked D) Failing to highlight a small section the customer has specifically asked about

A) Calling an investor's attention to a section that may be interesting A prospectus for any security, not just one for a mutual fund, may not be marked, highlighted, or otherwise altered in any way, nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.

An investor makes several statements regarding what they know about exchange-traded funds (ETFs). All of them are correct except A) I can't buy them on margin because they represent an entire basket of stocks like mutual funds do. B) I can expect them to have lower expense and operating costs than mutual funds. C) I won't have to pay any sales charges as I do with mutual funds, but I will have to pay commissions. D) I'll be able to buy or sell them throughout the trading day like stocks trading on an exchange.

A) I can't buy them on margin because they represent an entire basket of stocks like mutual funds do. Though mutual funds cannot be purchased on margin, ETFs can be. They can be traded throughout the trading day with purchases and sales commissionable transactions. They tend to have low expense ratios.

Hedge funds A) are not regulated under the Investment Company Act and no Securities and Exchange Commission (SEC) registration is required. B) are highly regulated, starting with the requirement to be registered with the SEC. C) are nonregulated but still require SEC registration. D) are regulated under the Investment Company Act of 1940 with no SEC registration required.

A) are not regulated under the Investment Company Act and no Securities and Exchange Commission (SEC) registration is required. Hedge funds normally do not require registration with the SEC as they are often sold under Reg D. Furthermore, they do not come under the Investment Company Act of 1940.

Of the following, reinvestment risk is most closely associated with A) call risk. B) inflation risk. C) capital risk. D) market risk.

A) call risk. When interest rates fall, callable securities are likely to be called. While the investor may receive the redemption proceeds sooner than anticipated, it is often difficult to reinvest while maintaining the same level of return due to the lower interest-rate environment. This is why reinvestment risk and call risk can be viewed as being closely associated with each other.

The Securities Act of 1933 exempts all of the following securities from registration except A) public real estate investment trusts (REITs). B) U.S. government issues. C) savings and loan issues. D) municipal issues.

A) public real estate investment trusts (REITs). Though some REITs trade on exchanges and others may not, all public REITs are nonexempt securities which must be registered with the Securities and Exchange Commission (SEC).

Which of the following investments would be most susceptible to inflation risk? A) Growth stock B) 30-year Treasury bond C) 10-year corporate bond rated BBB D) Value stock

B) 30-year Treasury bond Stocks generally have had performance that outpaces inflation. Lower quality bonds with shorter maturities would pay a higher rate than government bonds and have the potential to keep up with inflation. Treasuries have very low yields and do not keep pace with inflation.

Which class of shares use a CDSC as the main sales charge? A) Class A shares B) Class B shares C) No load D) Class C shares

B) Class B shares Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load, and class C shares charge a level load as part of the expense ratio. No load funds have no sales charge.

By virtue of a stocks listing for trading on a U.S. stock exchange, which of the following risks is reduced or even recognized as eliminated? A) Liquidity risk B) Market risk C) Equity risk D) Price risk

B) Market risk One of the advantages of a security being traded on a U.S. listed stock exchange is the ready availability of buyers and sellers. This means the investment can be considered a liquid one—easy to divest of at a fair price, if and when one needs to. (I feel like the answer should be A, but that's not what the Q-bank said.)

The ability to take the proceeds from the redemption of one security or investment and allocate those proceeds in such a way so as to maintain the same level of return is expressed in which of the following concepts? A) Market risk B) Reinvestment risk C) Interest-rate risk D) Purchasing power risk

B) Reinvestment risk The concept of reinvestment risk has to do with the ability to reinvest proceeds from one sale or redemption while still maintaining the same yield or return. This is difficult to do in times when interest rates are falling.

An LP is a type of A) corporate business entity. B) direct participation program. C) trust set up for investors. D) debt investment.

B) direct participation program. A limited partnership (LP) is the most common form of direct participation program (DPP). LPs are business entities allowing for the economic consequences of the business to flow through to the individual investors (partners).

A mutual fund's share class determines A) how the shares are delivered to the investor. B) how sales charges and related expenses are paid. C) the net asset value per share. D) how many shares the investor may purchase.

B) how sales charges and related expenses are paid. Individual mutual funds are often available to investors as Class A, Class B, or Class C, and there are other classes varying from fund to fund. The share class determines when and how the sales charge is paid. Class A shares have it paid when the shares are purchased, Class B shares have it paid when the shares are redeemed, and Class C shares have a small charge removed from the investor's account every quarter.

Limited partnerships A) must end on a predetermined vote with no exceptions. B) must end on a predetermined date or can be dissolved earlier by vote. C) can either exist in perpetuity or be designated to end on a specific date. D) must exist in perpetuity.

B) must end on a predetermined date or can be dissolved earlier by vote. Unlike with a corporate charter, which has corporate entities existing in perpetuity, limited partnerships are scheduled to end on a predetermined date. The exception to ending on that predetermined date would be when all partnership assets are sold earlier than anticipated and a vote to dissolve the partnership occurs.